August 8, 1990
Summary
Economic conditions in the Seventh District are mixed, with
manufacturing contributing the most consistent but slow improvement.
District employment rebounded in May, after two months of modest
decline, and general economic indicators for metropolitan areas in
the District expanded in June. Respondents report that manufacturing
continues to post modest gains in sales and orders, except among
defense-related markets. Retail spending in the District is mixed,
with sales growth linked to price cutting, and the housing market in
the Chicago area is softening. Several banks report a slowdown in
lending activity related to regulatory changes and a slower economy,
but overall credit standards are little changed from the beginning
of the year. Crop prices have been volatile in recent weeks, but
weather conditions have been near ideal.
Labor Markets and Economic Indicators
Labor market conditions in the District improved slightly in May,
but unemployment rates were noticeably higher than a year ago. Total
payroll employment in most District states rose in May, but remained
below the high for this year reached in February. Virtually all the
employment gains in recent months have come from the
nonmanufacturing sector, including increases in the Chicago area
despite sizable layoffs among several major retailers and financial
institutions. The average unemployment rate for the District dropped
a tenth of a percentage point to 5.6 percent in May from the
previous month. Michigan's unemployment rate was highest in May at
7.7 percent, but dropped to 7.3 percent in June. However, the
unemployment rate for the District a year ago averaged 5.0 percent,
with Michigan's rate near 6.0 percent.
Purchasing managers' surveys in the District generally showed activity expanding in June. The Detroit survey in June rose 2 points from the previous month to 50.9, marking the first time in fifteen months that the index registered an expansion in activity. Much of the improvement was centered in auto-related production and orders. The Chicago purchasing managers' survey for June continued to show expanding activity, but at a slower pace than in May. According to the survey, production edged down from the previous month, which was its highest level this year. Although orders slowed markedly in June and backlogs declined, the Chicago survey indicated that most purchasing agents expect business activity to improve over the rest of the year.
Manufacturing
Several respondents in the District reported that orders and
production were continuing to make modest improvements. Orders for
truck engines had an uptick in May, according to an industry source,
after being weak since late 1989. Orders and backlogs of nondefense
machinery were up in May, according to a capital-goods producer, but
defense-related orders were down significantly. An electronic
equipment producer reported good orders' growth in recent months,
despite some softness in key markets, including autos. While
shipments are not expected to "boom" this year, sales of electronic
components are expected to continue to improve. A producer of liner
board reported that an expected weakness in shipments this summer
has not materialized. After two months of flat sales, June and early
July sales turned around and were running slightly above trend. A
major supplier of construction materials stated that plants in the
District were operating on average at about 95 percent of capacity,
compared to 80 percent in the eastern parts of the nation.
Steel shipments for the second quarter were about the same as in the second quarter of 1989, according to a major steel producer in the District. Summer bookings have been strong, in part because of increases in auto production. Appliances appear to be booking normally for the summer. Total steel shipments in the third quarter are expected to be ahead of seasonal gains.
Consumer Spending and Real Estate
Retail sales activity in the District was mixed in June. An
economist for a major department store chain reported an overall
lackluster sales performance in June, despite good sales in auto
parts and appliances. Home improvement sales were particularly poor,
as were lawn and garden sales. Sales growth in Iowa and Wisconsin
was about average for the nation, but growth in Michigan and Indiana
was below average. While inventories were down in June, weak sales
pushed the retailer's inventory-to-sales ratio up. A major discount
chain in the District reported above average gains, led by strength
in apparel sales. Sales growth, however, was aided by increased
price cutting.
Housing sales in the Chicago area dropped in June from year-ago levels, according to an area realtor. Some of the decline was attributed to exceptionally high sales last year. However, June sales were also slightly below the six year average for that month, indicating some softness in the market. High priced homes are having the most difficulty selling, according to an industry analyst. The rate of pricing increases in the Chicago area has slowed significantly since last fall. Price increases since October were reportedly running slightly below the inflation rate, compared to double-digit rates earlier.
Banking
Several financial institutions in the District reported a slowdown
in the growth of lending activity in recent months. Commercial and
industrial loans were expanding below expectations at some banks,
which was attributed to softness in the economy. However, other
banks noted that loan growth was continuing at the trend rate.
Mortgage lending continued to be relatively strong in June,
according to several bank officials, although lending volume was
below a year ago. As a result of higher lending restrictions on S&Ls
that limit the share of total equity capital devoted to a single
loan customer, construction lending has been hard hit. Small
builders are particularly being affected, according to a financial
analyst.
Credit standards have changed little since early in the year, according to several respondents, but bank examiners have become increasingly thorough in evaluating loan risk. Highly leveraged borrowing is down sharply and, in many cases, banks have shortened the maturity of loans to limit risk exposure. However, most bankers stated that "quality" loans are having no problems with funding. One District bank reported picking up business from other banks that had backed out of projects in recent months.
Agriculture
Crop prices have been quite volatile in recent weeks, with much of
the volatility tied to weather conditions and the implications for
potential yields. Near ideal weather conditions over the last couple
of weeks have offset some of the earlier concerns about rain-delayed
planting and the heat wave in early July. Corn and soybean crop
conditions throughout much of the District are rated "good," despite
smaller-than-normal plant growth for this time of year. However,
yield prospects still hinge to a large extent on weather patterns
through mid-August and the timing of the first killing frost this
fall.